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Alena Olenich. Real estate investments: look before you leap

Альона ОленичJuscutum JSC’s corporate law practice lawyer Alena Olenich told the Ministry of Finance how not to fall into the trap of unscrupulous real estate developers.

The Economic Court of Kyiv on May 24, 2018, made a decision which obliged the defendant, that is the ordering customer of Perspektiva Residential Complex’s construction, to demolish the unauthorized construction “reconstruction of a non-residential building into a residential building at Teodora Draizera st., 40 in Desnyanskyi district of Kyiv”, as the facility, illegally constructed on a land plot, and bring the land plot to its former state.

This decision was the second one after the decision of the District Administrative Court of Kyiv made on May 24, 2017, in which the court decided to demolish previously built residential complex as an unauthorized construction facility.

These decisions have become a real shock not only for the investors who have invested their savings into that construction and now risk to lose their apartments but to the public as well. Taking into account the unstable economic situation, investment in construction remains probably the most common type of investment amongst the population, although a quite risky one.

What is the way out of the difficult situation for investors regarding Perspektiva Residential Complex?

First of all, you have to read carefully the agreement, which was concluded during payment for your future square meters. Provided that the agreement stipulates the responsibility for the developer in the case of breach of its obligations, you are entitled to demand payment of specified compensation. Provided the amount of such compensation satisfies the investor. Termination of the agreement may be another option, if the signed document stipulates this possibility and you are entitled to demand the recovery of the money paid. You should pay attention to the following aspect: the authorized capital of the developer of mentioned residential complex GLOBAL STROY 3 LLC accounts for only 1 500 000 UAH. Working capital, as practice shows, gets withdrawn before receipt of the first demands. So, in fact, at the expense of the authorized capital the company will be able to recover the cost of  maximum 3 apartments, the smallest ones.

Thus, penalties established in the agreement and the possibility to terminate the agreement are not a panacea for defrauded investors. Even if an investor appeals to the court and the court decides to terminate the agreement and recover the debt from the real estate developer, the execution of such decision is rather questionable. As has been mentioned above, the probability that current and other assets will be withdrawn long before the lawsuit gets to court is very high. The authorized capital will not cover even a hundredth part of the necessary payments, and the complex itself is a subject to demolition, as a result, there will be no funds or other tangible assets for decision’s fulfillment. A stalemate takes hold – there is a decision of the court, as well as the writ, but the debtor has no money.

A solution in the situation when the developer receives permits for construction of one particular real estate facility or the landplot has been allotted under intended purpose for a particular facility, but in fact, a completely different facility is being built, is giving publicity to the case. Provided public response and concerted actions of investors, local authority influenced by the society may introduce amendments to the landplot’s intended purpose. In this case, investors may be obliged to make further investment to finish construction of a building. The amount of additional funding will depend on the stage of construction. But such actions of local authorities are more likely to be a separate incident than the common practice.

So what the investors to do, who have invested money in the construction of a residential house, and it’s a subject to demolition by the court’s decision? The answer will not please everyone, because the probability to recover the money is almost zero. The court’s decision can only be canceled by a higher court, and if in cessation proceedings the Supreme Court endorses the decision of the first instance, it will be binding and no one shall effect it.

Invest wisely

The answer to the main question for the investor, that is “how to protect myself?” lies at the initial stage of the investment process, that is the selection of the project in which you will invest your money. Before you decide on a real estate facility for investment, you must consider many aspects.

First of all, you need to assess the reputation of the real estate developer, inspect the houses, which have already been put into operation, maybe even talk to the people living in the house built by this company. So you will be able to weed out a number of real estate development companies, which have not put into operation at least one house, or  delayed its commissioning, or used substandard materials in its construction.

The second and the most important aspect is documents. Be sure to ask the developer’s representatives to provide all permits and scrupulously study them. It would be even better if you involve an expert lawyer or another advisor at this stage. Minimum set of documents, which must be provided by the developer, includes an extract from the Unified State Register, the land documents confirming the ownership right or other legal basis for construction with the indication of a landplot’s intended purpose, permission for construction, general contractor’s license, town planning restrictions, the project of the house and its expertise, the technical conditions and so on.

Perspektiva Residential Complex investors could avoid this problem if they had carefully studied the set of documents, which is freely available on the complex’s website. The excerpt from the State Register of property rights to immovable property on the registration of ownership rights stipulates most clearly that the object of the real estate is an “incomplete construction, a school”, and the intended purpose of the landplot is a “completion of a school’s construction”. That alone should have alerted potential investors, or at least should have made them to carry out more detailed investigation of the situation.

In addition, on November 18, 2016 the decision of the District Administrative Court of Kyiv cancelled the Declaration of the start of construction works and made a decision on “Taking response measures in the field of state supervision (control) in the form of a complete termination of construction works for construction of apartment houses on Teodora Draizera st., 40 in Desnyanskyi district of Kyiv, and stop operation of illegally constructed building “Sales Department” on Teodora Draizera st., 40 in Desnyanskyi district of Kyiv”.

Legal ignorance of the majority of our population is very beneficial for unscrupulous developers. Even the availability of information on the Internet does not protect ordinary citizens from investing in the notoriously problematic objects.

Perspektiva Residential Complex as a taken example proves once again that for an ordinary citizen, even with all the information freely available, it is difficult to understand the specific features of investing in real estate. This is the case when the advice and support of professional lawyers and legal advisers will save not only your time and money but also will help you to avoid situations when you become a property owner in the complex on the verge of its demolition.

Alena Olenich, Juscutum JSC’s corporate law practice lawyer.